2. Suppose a typical person has the following two-period utility function: U(C1, C2) = In(c) +...

 

 

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2. Suppose a typical person has the following two-period utility function: U(C1, C2) = In(c) + In(c) Marginal utility of consumption in the first period is MU = and MU = C C1 Cz Where is the consumption level in period 1 and C2 is the consumption level in period 2. Suppose, the income level in period 1 is $1,000 and the income level in period 2 is $300. The interest rate is 5% (0.05). a) Compute the optimal level of consumption for each period and saving in the first period. b) Suppose the interest rate has increased to 10% (0.1). What is the effect of the increase in the interest rate on saving? Compute the optimal level of consumption for each period and saving in the first period. c) Suppose the first period income has increased to $1,200. What is the effect of the increase in the interest rate on saving? Compute the optimal level of consumption for each period and saving in the first period. 2. Suppose a typical person has the following two-period utility function: U(C1, C2) = In(c) + In(c) Marginal utility of consumption in the first period is MU = and MU = C C1 Cz Where is the consumption level in period 1 and C2 is the consumption level in period 2. Suppose, the income level in period 1 is $1,000 and the income level in period 2 is $300. The interest rate is 5% (0.05). a) Compute the optimal level of consumption for each period and saving in the first period. b) Suppose the interest rate has increased to 10% (0.1). What is the effect of the increase in the interest rate on saving? Compute the optimal level of consumption for each period and saving in the first period. c) Suppose the first period income has increased to $1,200. What is the effect of the increase in the interest rate on saving? Compute the optimal level of consumption for each period and saving in the first period.